Banks Worried Over FDIC Debt Guarantees

With all the discussion over fed funds, I thought I'd point out this recent American Banker article revealing that many banks are concerned over the 75-basis-point fee the FDIC will start to charge on Nov. 13 for guaranteeing bank debt.

With the fed funds rate at one percent, the fee would almost double the cost of issuing new senior unsecured debt, the banks argue. And opting out of the program, which the FDIC announced last month to help the functioning of interbank markets, is not without consequences: The FDIC has decided to list the names of such banks on its web site.

The most vocal banks appear to be smaller ones who say that the fee will force them to opt out.

"If you leave the assessed fee" at 75 basis points "in the current economic conditions, many smaller banks will opt out," Jim Murphy, a vice president at the $452 million-asset Pacific State Bank in Stockton, Calif., wrote in an Oct. 29 letter. "They may then be at a severe competitive disadvantage in terms of retaining and attracting customers."

You can read other letters sent to the FDIC over the debt-guarantee program here.